Foreclosure
Foreclosure Process in California
Real Property Loans in California
Most real property purchases in California involve some form of financing. The financing can come from a variety of sources, such as a bank, hard money lender, friend, relative, or a seller carryback. In any residential or commercial real estate purchase that involves financing, it is likely that the borrower will sign a promissory note and a deed of trust.
The promissory note is the document that contains the precise terms of the loan and the borrower’s promise to repay the loan. The purpose of the promissory note is to document in writing the existence of the loan and its terms. A promissory note can be unsecured or secured via a deed of trust.
The deed of trust is a document that gives the lender a security interest in the property that is subject to the loan. A deed of trust must be properly drafted, include a legal description of the real property that is secures, and be recorded in the county in which the real property is located. If a borrower defaults on a loan that is secured by a deed of trust, as explained below the lender has the option to pursue: (1) judicial foreclosure; or (2) non-judicial foreclosure.
Judicial v. Non-judicial Foreclosures in California
In California, lenders can foreclose on deeds of trust using a non-judicial foreclosure process or a judicial foreclosure process. The non-judicial foreclosure process is handled outside of court and the judicial foreclosure process is handled through the courts through a formal lawsuit. The vast majority of foreclosures in California are non-judicial because it can be handled without a formal lawsuit and is generally a speedier and cheaper process for the lender. Lender’s usually choose judicial foreclosure if the lender is seeking a deficiency judgment or if for some reason their deed of trust does not contain a “power of sale” clause.
Judicial Foreclosure
Judicial foreclosure begins with the lender filing a complaint against the borrower. The complaint must be filed in the superior court of the county in which the real property is located. As with most lawsuits, this process can be lengthy and expensive. A critical distinction between judicial and non-judicial foreclosure is the lender’s ability to pursue the borrower for a deficiency judgment if the sale price at a trustee’s sale is less than the full amount of the borrower’s obligation. A deficiency judgment is only an option for lenders that pursue judicial foreclosure.
If the lender is successful with their lawsuit to foreclose, the court will order the sale of the property through an auction. Another key distinction with a judicial foreclosure is that the borrower has a right of redemption from the new owner for up to one year after the sale of the property that is conducted through a judicial foreclosure.
Investor Tip: If you are considering purchasing a property at an auction, it is important to research whether the property is being auctioned off through a non-judicial foreclosure or through a court ordered foreclosure. The reason you want to know these details is due to the borrower’s right to redemption that is available in a judicial foreclosure. You could be surprised several months after the purchase when the borrower shows up to get their property back.
Non-judicial Foreclosure
Non-judicial foreclosures are the most common types of foreclosure in California. The lender’s ability to pursue a non-judicial foreclosure comes from the “power of sale” clause in the deed of trust. The power to sell the property to satisfy the borrower’s debt is generally given to the trustee who acts on behalf of the lender (beneficiary) by recording and sending a Notice of Default and Notice of Sale.
Many lenders prefer to use non-judicial foreclosure because it is faster and less expensive than judicial foreclosure and does not grant redemption rights to the borrower. However, with a non-judicial foreclosure the lender gives up the right to obtain a deficiency judgment against the borrower to make up the difference between the amount owed on the promissory note and the proceeds from the trustee’s sale of the property. See CCP § 580d.
Non-judicial Foreclosure Process
The following is the basic non-judicial foreclosure process in California.
Notice of Default
Generally, upon demand from the lender, the trustee initiates a non-judicial foreclosure by recording a notice of default in the county in which the property is located. The trustee must also mail a copy of the notice of default to the borrower within 10 business days. The purpose of the notice of default is to provide notice to the borrower, its successors, junior lien holders, and anyone else that may have an interest in the property, that there has been a default. The following are some key information a notice of default must include:
Identity of the borrower
A legal description of the property
Specify the type of breach that has occurred
List the specific dollar amount due
Declare the lender’s election to sell the property
Include the lender’s contact information
Contain information for borrower to cure the default
After the notice of default is recorded, the clock starts ticking for the borrower to cure the default or face a trustee’s sale. For 90 days following recording of the notice of default, the borrower, as well as any junior lienholder with a recorded lien, have the opportunity to cure the default and “reinstate” the loan by paying all amounts in default and all reasonable costs and expenses incurred by the lender, including trustee’s and attorney’s fees. The reinstalment right may be exercised from the date the notice of default is recorded until 5 business days before
Notice of Default
Generally, upon demand from the lender, the trustee initiates a non-judicial foreclosure by recording a notice of default in the county in which the property is located. The trustee must also mail a copy of the notice of default to the borrower within 10 business days. The purpose of the notice of default is to provide notice to the borrower, its successors, junior lien holders, and anyone else that may have an interest in the property, that there has been a default. The following are some key information a notice of default must include:
- Identity of the borrower
- A legal description of the property
- Specify the type of breach that has occurred
- List the specific dollar amount due
- Declare the lender’s election to sell the property
- Include the lender’s contact information
- Contain information for borrower to cure the default
After the notice of default is recorded, the clock starts ticking for the borrower to cure the default or face a trustee’s sale. For 90 days following recording of the notice of default, the borrower, as well as any junior lienholder with a recorded lien, have the opportunity to cure the default and “reinstate” the loan by paying all amounts in default and all reasonable costs and expenses incurred by the lender, including trustee’s and attorney’s fees. The reinstalment right may be exercised from the date the notice of default is recorded until 5 business days before
Notice of Sale
Generally, 90 days after recording the notice of default, the trustee may record a notice of sale and mail a copy to the borrower and all other persons that have requested special notice, post the notice of sale at the property, post the notice in a public place within the county where the property is located (usually at the courthouse), and publish the notice of sale in a newspaper of general circulation in the city where the property is located. The notice of default must be recorded at least 20 days prior to the sale. As a result, the earliest that a trustee’s sale can take place is about 110 days after the notice of default is recorded. California trustees sales must take place between the hours of 9 a.m. and 5 p.m. on business days, Monday through Friday.
(Cal. Civ. Code § 2924g).
The Foreclosure Sale
The trustee’s sale is an auction that is public and open to all bidders. The highest bidder at the sale becomes the new owner of the property. A lender and the borrower are also allowed to bid at the auction. Usually, the lender will make what is called a “credit bid” rather than bidding cash. A credit bid is a bid for up to the amount of the borrower’s debt. A lender may make a credit bid the full amount of the debt or for less than the full amount of the debt. When a winning bidder emerges at the auction, they receive title to the property through a trustee’s deed upon sale.
Real Estate Finance Attorney
Real Estate Law Corporation™
If you need legal assistance with a foreclosure or a real estate transaction that involves seller financing, Real Estate Law Corporation has highly experienced real estate attorneys that serve clients in the greater Sacramento area and all over California. Real Estate Law Corporation regularly assists clients with non-judicial foreclosures and drafts seller financing documents for residential and commercial real estate transactions.
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